Police shot Kelly Kwalik after he threatened to open fire on them during an early morning raid on a house in Timika, on the southern coast, Papua province police spokesman Agus Riyanto said.
"We had to shoot him as he tried to shoot the police with a kind of revolver and evade arrest," he said, adding that the dead man had not been formally identified.
"He was shot in the left leg and brought to hospital. He died at the hospital."
DNA tests are reportedly under way to try to confirm whether the dead man is Kwalik, a commander of the Free Papua Movement (OPM) who is accused of multiple kidnappings and attacks on employees of US miner Freeport McMoran.
The OPM has waged a low-level insurgency against Indonesian rule since 1964, a year after the Netherlands ceded sovereignty of the resource-rich, ethnically Melanesian region to Indonesia.
Kwalik, who is aged in his 60s, has been commanding the insurgency around the towns of Mimika and Timika since 1977.
The area includes Freeport's giant Grasberg mine, which sits on one of the biggest gold and copper reserves in the world and provides the Indonesian government with its largest single source of tax revenue.
The mine and its security arrangements with the Indonesian military have long been linked to human rights abuses against local Papuans, who complain they have been denied income from the use of their lands.
The road linking Timika to the mine in the rugged highlands to the north has been the scene of a string of mysterious ambushes over the past six months.
Australian mine technician Drew Grant was killed in a July 11 attack, while a Freeport security guard and a policeman were killed the following day.
Indonesian media reported that Kwalik had claimed responsibility for the attacks but his associates deny this. Others have speculated that the ambushes are the work of rogue elements in the Indonesian security forces.
Kwalik has been on a police wanted list since 2002 when he allegedly ordered an attack on a convoy of Freeport employees in which an Indonesian and two US civilians were killed.
In 1986 his group was said to have kidnapped and killed eight Javanese students who were on a hiking holiday.
Ten years later he allegedly ordered the kidnapping of a 12-strong scientific research -- four Indonesians, four Britons, two Germans and two Dutch.
Two of the Indonesians were killed in a military rescue operation which freed the hostages three months later.
In 2001 Kwalik?s men allegedly kidnapped two Belgian journalists and held them for two months before releasing them.
Little is known about Kwalik but he is believed to be one of the most active and ideologically committed commanders in the OPM, which is largely dormant in other areas.
"Kelly Kwalik is one of the OPM?s most elusive commanders. To many in Papua he is also one of the 'purest' in terms of devotion to the cause," the International Crisis Group think tank said in a 2006 report.
It said he had lost land to the Freeport mine and had tapped into local anger over dispossession and human rights abuses.